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Catching a falling knife

03 November 2015 by lberuti

Because credit indices are trading at levels that we have not seen since the beginning of August, some people begin to call a bottom (in risk premium terms, so a high in cash price). And recently 300bps on iTraxx Crossover S24 5 year (ITXEX524) and 70bps on iTraxx Main S24 5 year (ITXEB524) had provided some kind of floor in creditland. But today cracks appeared, especially on ITXEX524, and protection felt well offered despite the fairly thin liquidity. Arbitrage attempts (people trying to take advantage of the difference between the quoted value of credit indices and the value implied by their constituents) failed during the day when people tried to buy index protection and sell protection on single reference CDS, which means that the single name market will not slow down the index tightening just yet. Credit indices could be on their way to even tighter levels.